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ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law

Dalton Ltd, a private company, wishes to buy back its shares but has insufficient distributable profits and cannot make a fresh issue. Which statement is correct?

A private company may, as a last resort and if its articles allow, fund a buyback from capital. Safeguards apply, notably a directors' solvency statement and shareholder approval by special resolution, to protect creditors from an improper return of capital.

  1. AIt may be permitted to pay for the buyback out of capital, subject to safeguards such as a solvency statement by the directors and shareholder approval by special resolutionCorrect
  2. BIt may pay out of capital freely by ordinary board decision with no safeguards
  3. CIt is prohibited in all circumstances from buying back any shares
  4. DIt may use the share premium account without restriction because it is a private company

Explanation

Private companies may, if authorised by their articles, fund a buyback from capital as a last resort. Safeguards include a directors' solvency statement and a special resolution of shareholders. It is not unrestricted and is not banned outright.

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